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Discovery: Well-Positioned To Meet Evolving Consumer Demand

Jun. 10, 2020 12:22 PM ETWarner Bros. Discovery, Inc. (WBD)18 Comments
Neutral Investing profile picture
Neutral Investing


  • Discovery's revenue from advertising and distribution has grown consistently since 2014, both in the US market and the International market.
  • Discovery's increasing use of the digital platform to provide content gives an opportunity to capture a growing commercial market.
  • While advertising revenues may be deferred due to show cancellations from COVID-19, Discovery has managed to create new content that resulted in Top Ratings across its network channels.
  • We estimate Discovery's fair value to be ~USD 36 (44% upside from the current level).

Media companies that provide content through linear platforms are experiencing a decline in viewers and subscribers. Even among major media conglomerates, the hype is all related to their digital platforms. However, one particular company is in a good position to ride the wave of transition from linear networks to direct-to-consumer ("DTC") subscription products. That company is Discovery Inc. (DISCA).

Number of subscribers among major brands (Millions):

Consistent Revenue Growth while keeping costs the same

DISCA generates revenue mainly from sales on advertising on its networks and fees from contracts with cable and satellite operators as well as digital service providers for distributing its network content. Advertising and Distribution revenues grew every year for the last 4 years, both in the US and International markets. Following a successful acquisition of Scrips Networks Interactive in 2017, DISCA was able to offset the subscriber loss in its Discovery Legacy portfolio. Over the last few months, DISCA has been raking in TV ratings garnering new viewers among its core demographic audience. Considering advertising price and distribution fees depend on audience satisfaction level or ratings as well as the number of viewers, DISCA can use their performance ratings to demand higher fees.

Source: Discovery Corporate Newsroom

Revenue by Segment and Geography (US Bn):

Despite decreasing demand in linear TV as shown by the decreasing number of subscribers across its network, DISCA still maintains profitability by leveraging its lower cost production model. DISCA's advertising expenses are captured as selling, general, and administrative costs, whereas distribution cost or COGS primarily derives from content expenses including production.

Flexibility in Digital Platforms Integration

Discovery's increasing utilization of digital platforms to expand reach for advertisers shows versatility in a declining industry, while still maintaining a great partnership with their distributors. DISCA provides existing networks and channels using its distribution relationship with Cable

This article was written by

Neutral Investing profile picture
My investment approach is in finding sector neutral stock picks (by going long on a good company and short the bad one). I am more focused on minimizing risk than maximising returns.

Analyst’s Disclosure: I am/we are long DISCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (18)

Exile of the Mainstream profile picture
Management here is terrible. I've tried communicating with IR and even wrote an open letter on SA.

The stock has become a trading sardine. Operationally, they aren't doing anything useful either. Zero communication and PR.

I see your undervaluation but I caution new investors.
LONGBULL+ profile picture
Discovery is a buy out company most likely target Comcast
Apple could use Discovery too
bluescorpion0 profile picture
so long DISCA 2 year options is best strategy here?
longbullplus: The premise that DISCA would be taken out has been floating around for nearly five years. In that time DISCA has lost approximately 1/3 of its value--even as it has repurchased its shares at ever higher prices--and then turned around and granted enormous amounts of options and SARs to Zaslav and Maffei. The same story surrounded Malone's STRZA years ago. It was eventually merged through a take-under with LionsGate. In addition, they have nearly $17 Billion in debt and off-balance sheet obligations. It is up less than 10% over 10 years....don't see AAPL or CMCSA taking them out.
bluescorpion0 profile picture
I'm sorry to say but Maffei has zero involvement in Discovery - corporate.discovery.com/...

I don't think he's getting anything. And Malone is on the board but I doubt he's getting paid much. So it's just Zaslav and team who is overpaid.
LONGBULL+ profile picture
better buy Apple soon $ 400.......
Overall, from what I've read seems a good buy with those metrics but I don't fully know the company and was intrigued by the comment of james k b.

Also, doing some calculation, I was worried by the amount of debt and didn't find any information about the debt maturity. Does someone have that information please?

DISCA and DISCK have been down over 1,2,3,4 and 5 years. They are barely treading water over 10 years. In the meanwhile, there CEO David Zaslav is one of the highest paid CEO's in the world. In addition, he has been granted the right to acquire Malone's super voting "B" shares at some future date, ensuring his continuing control of the company. In the bull market of the last 4+ years they have actually been able to see a substantial erosion in equity value. They have continuously bought back shares at higher prices and, in turn, have issued stock options to Zaslav that have contributed to his centi-millionaire status. Finally, they have not returned one single penny to shareholders in the last decade. SO, why should now be any different?
james kb: Couldn't have said it better.
Billionaire aka Cable cowboy John Malone invested heavily on the same side with common shareholders, at a higher price and is long both stocks you mention. He seems to see a big discount in case the company reaches customers directly through streaming and partnerships. In case the company misses this transformation, he still sees a bargain in the stock due to a low price to fcf and well laddered debt maturities post merger. No stock but looking closely at the fundamentals.
Just4u: his "heavy investment" was substantially less than 1% of his net worth. In addition, ha has absolute control over all decisions due to his "B" shares which, by the way, trade at close to a 100% premium to the "A" and "B" shares. This disconnect exists despite the fact that the economic interest of each class of stock is identical....Just as another Malone "travesty" if you look tat the LTRPA and LTRPB share you will notice a similar disconnect that has only arisen in the last several months. While the "A" shares trase at around $3 the "B" (control shares) trade at over $60. ..I have had these as legacy stocks from the original TCOMA acquisition of UACI in 1988. I have also received the other 19 Liberty "step children". They have not performed very well-absent LBRDK and LBRDA-- since Malone has substantially stepped back 5 years ago. In the last five years LBTYA,LBTYK,DISCA,DISCK,QRTEA,LSXMA,LSXMK,LILA,LILAK,ASCMA have all seen a declining stock price. Some quite substanital. The old Cable cowboy is old and almost retired.
Basit Saliu profile picture
$DISCA owns 50% of All3Media it needs to gain full ownership.
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